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Consumer Financial Protection Circular


CONSUMER FINANCIAL PROTECTION CIRCULAR 2024-03


UNLAWFUL AND UNENFORCEABLE CONTRACT TERMS AND CONDITIONS


QUESTION PRESENTED

Can persons that include unlawful or unenforceable terms and conditions in
contracts for consumer financial products and services violate the prohibition
on deceptive acts or practices in the Consumer Financial Protection Act (CFPA)?


RESPONSE

Yes. “Covered persons” and “service providers” must comply with the prohibition
on deceptive acts or practices in the CFPA.1 The inclusion of certain terms in
contracts for consumer financial products or services may violate the
prohibition when applicable federal or state law renders such contractual terms,
including those that purport to waive consumer rights, unlawful or
unenforceable.


BACKGROUND ON UNLAWFUL AND UNENFORCEABLE CONTRACT TERMS

Many federal laws—including statutes enforced by the CFPB—render unlawful or
unenforceable various contract terms in certain contexts. For example, as
highlighted in a recent CFPB compliance bulletin,2 the Consumer Review Fairness
Act of 2016 generally prohibits the use of form contracts that limit how
consumers communicate their reviews, assessments, or similar analysis of the
sale of goods or services, and invalidates these types of contract terms and
conditions.3 As another example, Regulation Z, which implements the
Truth-in-Lending Act (TILA), prohibits the inclusion in a residential mortgage
loan or open-ended consumer credit plan secured by the principal dwelling of
terms requiring arbitration or any other nonjudicial procedure as the method for
resolving any controversy or settling claims arising out of the transaction.4
The Electronic Fund Transfer Act (EFTA) prohibits contract terms that contain a
“waiver of any right conferred” by EFTA and prohibits waivers of any “cause of
action” under EFTA.5 And the Military Lending Act and its implementing
regulations generally prohibit terms in certain consumer credit contracts that
require servicemembers and their dependents to “waive the covered borrower’s
right to legal recourse under any otherwise applicable provision of State or
Federal law . . . .”6

In addition to express prohibitions like these, a recent federal district court
decision held that the Servicemembers Civil Relief Act (SCRA) renders
unenforceable provisions in contracts with servicemembers that purport to waive
their right to participate in class actions to enforce the SCRA.7 The Federal
Trade Commission also administers laws that forbid certain contractual waivers.8
And certain state laws similarly prohibit or restrict the use of waivers in
consumer contracts.9


ANALYSIS

The CFPB is issuing this Circular to emphasize that covered persons who include
unlawful or unenforceable terms in their consumer contracts may violate the
CFPA’s prohibition on deceptive acts or practices.10

Covered persons may violate the CFPA’s prohibition on deceptive acts or
practices if they include terms, including waiver provisions, in their consumer
contracts that are rendered unlawful or unenforceable by federal or state law.
Under the CFPA, a representation or omission is deceptive if it is likely to
mislead a reasonable consumer and is material. A representation is “material” if
it “involves information that is important to consumers and, hence, likely to
affect their choice of, or conduct regarding, a product.”11 A contractual
provision stating that a consumer agrees not to exercise a legal right is likely
to affect a consumer’s willingness to attempt to exercise that right in the
event of a dispute. Moreover, certain categories of information, including
express representations, are presumptively material.12

In the recent compliance bulletin noted above, the CFPB reminded covered persons
that they could be liable under the CFPA if they deceive consumers using form
contract restrictions on consumer reviews that are unenforceable.13 The CFPB
explained that “including an unenforceable material term in a consumer contract
is deceptive, because it misleads consumers into believing the contract term is
enforceable,” and that “disclaimers in a contract such as ‘subject to applicable
law’ do not cure the misrepresentation caused by the inclusion of an
unenforceable contract term.”14 Similarly, qualifying a provision that purports
to waive a consumer right with “except where unenforceable” is unlikely to cure
the provision’s misleading or material nature. Neither do disclaimers that are
issued after the fact.15

CFPB supervisory examiners have identified several violations of the CFPA’s
prohibition on deception stemming from covered persons’ use of unlawful or
unenforceable contract terms and conditions.16 In addition, in several prior
enforcement matters, the CFPB has found covered persons to have violated the
CFPA by including in contracts for consumer financial products or services terms
that are unlawful or unenforceable under federal or state law, such as waivers
that are prohibited by federal or state law. For example, the CFPB found that a
respondent bank engaged in a deceptive practice under the CFPA when it
represented to consumers that because they signed a deposit agreement including
broad language directing the bank not to contest legal process, consumers had
waived their right to hold the bank liable for improperly responding to
garnishment notices; in fact, regardless of the language in the account
agreement, consumers had the right to challenge the garnishments.17 In another
matter, the CFPB found that a respondent auto loan servicer violated the CFPA’s
deception prohibition when it used loan extension agreements or written
confirmations that included language that created the net misimpression that
consumers could not exercise bankruptcy protection rights, which was false.18 In
fact, an agreement to waive an individual’s right to file for bankruptcy is void
as against public policy,19 rendering terms that purport to waive such right
generally unenforceable. The CFPB found in a different matter that a respondent
non-bank remittance transfer provider engaged in a deceptive act or practice in
violation of the CFPA when it made misleading statements in disclosures
purporting to limit consumers’ error resolution rights, in violation of EFTA and
the Remittance Rule.20 And, in a recent report, the CFPB highlighted that
certain student tuition payment plan agreements and financial responsibility
agreements “include terms and conditions that purport to waive consumers’ legal
protections, limit how consumers enforce their rights, or misrepresent the
rights or protections available to consumers under existing law.”21 Some of
these terms and conditions, such as purported waivers of the right to retain
counsel and the right to seek discharge in bankruptcy proceedings, are likely
unenforceable and thus similarly raise deception risk.

As these examples demonstrate, the inclusion of unlawful or unenforceable terms
and conditions in consumer contracts is likely to mislead a reasonable consumer
into believing that the terms are lawful and/or enforceable, when in fact they
are not. Further, the representations made by the presence of such terms are
often material, presumptively so when they are made expressly. In particular,
consumers are unlikely to be aware of the existence of laws that render the
terms or conditions at issue unlawful or unenforceable, so in the event of a
dispute, they are likely to conclude they lawfully agreed to waive their legal
rights or protections after reviewing the contract on their own or when covered
persons point out the existence of these contractual terms and conditions.
Deceptive acts and practices such as these pose risk to consumers, whose rights
are undermined as a result, and distort markets to the disadvantage of covered
persons who abide by the law by including only lawful terms and conditions in
their consumer contracts.

Thus, the inclusion of unlawful or unenforceable terms in consumer contracts,
including unlawful or unenforceable waiver provisions, may violate the CFPA’s
prohibition on deceptive acts or practices.


ABOUT CONSUMER FINANCIAL PROTECTION CIRCULARS

Consumer Financial Protection Circulars are issued to all parties with authority
to enforce federal consumer financial law. The Consumer Financial Protection
Bureau (CFPB) is the principal federal regulator responsible for administering
federal consumer financial law, see 12 U.S.C. 5511, including the Consumer
Financial Protection Act’s prohibition on unfair, deceptive, and abusive acts or
practices, 12 U.S.C. 5536(a)(1)(B), and 18 other “enumerated consumer laws,” 12
U.S.C. 5481(12). However, these laws are also enforced by state attorneys
general and state regulators, 12 U.S.C. 5552, and prudential regulators
including the Federal Deposit Insurance Corporation, the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, and the National Credit Union Administration. See, e.g., 12 U.S.C.
5516(d), 5581(c)(2) (exclusive enforcement authority for banks and credit unions
with $10 billion or less in assets). Some federal consumer financial laws are
also enforceable by other federal agencies, including the Department of Justice
and the Federal Trade Commission, the Farm Credit Administration, the Department
of Transportation, and the Department of Agriculture. In addition, some of these
laws provide for private enforcement.

Consumer Financial Protection Circulars are intended to promote consistency in
approach across the various enforcement agencies and parties, pursuant to the
CFPB’s statutory objective to ensure federal consumer financial law is enforced
consistently. 12 U.S.C. 5511(b)(4). Consumer Financial Protection Circulars are
also intended to provide transparency to partner agencies regarding the CFPB’s
intended approach when cooperating in enforcement actions. See, e.g., 12 U.S.C.
5552(b) (consultation with CFPB by state attorneys general and regulators); 12
U.S.C. 5562(a) (joint investigatory work between CFPB and other agencies).

Consumer Financial Protection Circulars are general statements of policy under
the Administrative Procedure Act. 5 U.S.C. 553(b). They provide background
information about applicable law, articulate considerations relevant to the
Bureau's exercise of its authorities, and, in the interest of maintaining
consistency, advise other parties with authority to enforce federal consumer
financial law. They do not restrict the Bureau’s exercise of its authorities,
impose any legal requirements on external parties, or create or confer any
rights on external parties that could be enforceable in any administrative or
civil proceeding. The CFPB Director is instructing CFPB staff as described
herein, and the CFPB will then make final decisions on individual matters based
on an assessment of the factual record, applicable law, and factors relevant to
prosecutorial discretion.­


FOOTNOTES

 1.  12 U.S.C. 5481(6), (26), 5531, 5536. For simplicity, the remainder of this
     Circular refers to covered persons and service providers as “covered
     persons.”
 2.  CFPB, Bulletin 2022-05: Unfair and Deceptive Acts or Practices That Impede
     Consumer Reviews (Mar. 22, 2022),
     https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf
     .
 3.  15 U.S.C. 45b.
 4.  12 CFR 1026.36(h)(1), implementing 15. U.S.C. 1639c(e)(1).
 5.  15 U.S.C. 1693l; see also, e.g., Choice Money Transfer, Inc. d/b/a Small
     World Money Transfer at ¶¶ 79-83, File No. 2022-CFPB-0009 (Oct. 4, 2022)
     (consent order) (finding remittance transfer provider violated section
     1693l by including waiver of consumer rights in disclosure consumers were
     required to sign); Chime, Inc. d/b/a Sendwave at ¶¶ 26-29, File No.
     2023-CFPB-0012 (Oct. 17, 2023) (consent order) (finding violation of
     section 1693l where remittance transfer provider required consumers to sign
     a remittance services agreement containing language limiting consumers’
     damages and claims for costs and attorney fees, contrary to the provisions
     for defendant liability contained in section 1693m(a)(3)).
 6.  32 CFR part 232.8(b), implementing 10 U.S.C. 987(e)(2).
 7.  Espin v. Citibank, N.A., No. 5:22-CV-383-BO-RN, 2023 WL 6449909, at *3
     (E.D.N.C. Sept. 29, 2023) (denying defendant’s motion to compel arbitration
     and observing that the SCRA was “amended to codify the unwaivable right of
     servicemembers to bring and participate in class actions, ‘notwithstanding
     any previous agreement to the contrary’”) (quoting 50 U.S.C. § 4042(a)).
 8.  See 16 CFR part 442(a)(2) (FTC’s 1984 Credit Practices Rule, prohibiting
     the use of contract terms purporting to waive a consumer’s state law right
     to block creditors from seizing personal or real property of the consumer
     in which they do not hold security interests). The FTC also has interpreted
     Section 604(b)(2)(A) of the Fair Credit Reporting Act (FCRA) to prohibit
     the inclusion of a waiver of consumer rights in a disclosure form required
     under that section, observing that “it is a general principle of law that
     benefits provided to citizens by federal statute generally may not be
     waived by private agreement unless Congress intended such a result.” FTC,
     Division of Credit Practices, Staff Opinion Letter (June 12, 1998), 1998 WL
     34323756, at *1 (citing Brooklyn Savings Bank v. O'Neill, 324 U.S. 697
     (1945)). In addition, while not an express prohibition on waivers, the
     FTC’s Preservation of Consumers’ Claims and Defenses rule, commonly known
     as the “Holder Rule” and also enforced by the CFPB, requires sellers of
     goods or services to consumers to include a provision in their finance
     contracts that ensures that if another person holds the loan or lease a
     consumer uses to finance acquisition of a good or service from a seller or
     lessor, then the holder is subject to the same consumer rights and defenses
     that the consumer had with respect to the seller or lessor, thereby
     emphasizing the importance of preserving consumer rights. 16 CFR part 433.
 9.  For instance, the California Consumer Privacy Act affords consumers certain
     rights to know how their information will be used, instructs businesses not
     to sell consumers’ personal information, and deems “void and unenforceable”
     any contractual provision “that purports to waive or limit in any way
     rights under this title, including, but not limited to, any right to a
     remedy or means of enforcement.” See generally Cal. Civ. Code sec. 1798.100
     et seq. described at https://oag.ca.gov/privacy/ccpa ; Cal. Civ. Code sec.
     1798.192. Further, certain state laws, including those of California,
     Illinois, Kansas, and Tennessee, contain outright prohibitions of waivers
     of legal protections in general consumer protection laws. See Cal. Civ.
     Code. sec. 1751 (barring waivers of protections under California Consumers
     Legal Remedies Act); Ill. St. Ch. 815 sec. 505(10c), Waiver or modification
     (barring waiver or modification of protections under consumer fraud and
     deceptive practices statute); Kan. Stat. 50-625(a), Waiver (generally
     prohibiting waivers of rights or benefits under the Kansas Consumer
     Protection Act, unless otherwise specified in the statute); Tenn. Stat.
     47-18-113(a) (generally prohibiting waivers “by contract, agreement, or
     otherwise” of provisions of the Tennessee Consumer Protection Act of 1977).
 10. Covered persons also should comply with other consumer protection laws
     enforceable by the CFPB that may apply to their conduct, including but not
     limited to EFTA / Regulation E, RESPA / Regulation X, and TILA / Regulation
     Z.
 11. Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000) (quoting In re
     Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984)) (emphasis added).
 12. See, e.g., CFPB v. Chou Team Realty LLC, Case No. 8:20-cv-00043-SB-ADS,
     2021 WL 4077110, at *4 (C.D. Cal. Aug. 10, 2021) (citing FTC v. Pantron I
     Corp., 33 F.3d 1088, 1095-96 (9th Cir. 1994)); FTC v. NCH, Inc., Civ.A. No.
     CV-S-94-138LDG, 1995 WL 623260, at *8 (D. Nev. May 25, 1995) (“express
     representations that are shown to be false are presumptively material”)
     (citing Cliffdale Assocs., 103 F.T.C. at 168, 182).
 13. CFPB, Bulletin 2022-05: Unfair and Deceptive Acts or Practices That Impede
     Consumer Reviews (Mar. 22, 2022),
     https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf
     (“Bulletin 2022-05”).
 14. Id. at 4-5; cf. Ruth v. Triumph P’ships, 577 F.3d 790, 801-02 (7th Cir.
     2009) (“To threaten to take some action ‘to the extent permitted by law[]’
     . . . is to imply that, under some set of circumstances and to some extent,
     the law actually permits that action to be taken.”).
 15. Bulletin 2022-05 at 5 (citing FTC v. IAB Marketing Assocs., LP, 746 F.3d
     1228, 1233 (11th Cir. 2014)).
 16. See Supervisory Highlights: Summer 2015, at 15, available at
     https://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf
     (deceptive waivers of borrowers’ rights in mortgage loan agreements that
     were unenforceable under Regulation Z, implementing TILA); Supervisory
     Highlights: Fall 2015, at 17, available at
     https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf
     (same); Supervisory Highlights: Summer 2017, 82 FR 48703, 48708 (Oct. 19,
     2017) (deceptive waivers of borrowers’ rights in loss mitigation agreements
     that were unenforceable under Regulation Z, implementing TILA); Supervisory
     Highlights, Issue 24, Summer 2021, 86 FR 36108, 36117 (July 8, 2021)
     (deceptive waivers of rights in security deed riders that were
     unenforceable under Regulation X, implementing the Real Estate Settlement
     Procedures Act); Supervisory Highlights, Issue 28, Fall 2022, 87 FR 72449,
     72455 (Nov. 25, 2022) (deceptive waiver of borrowers’ rights in loan
     security agreements that was unenforceable under Regulation Z, implementing
     TILA).
 17. In the Matter of Bank of America, N.A. (2022-CFPB-0002),
     https://www.consumerfinance.gov/enforcement/actions/bank-of-america-na/.
 18. In the Matter of Nissan Motor Acceptance Corp. (2020-BCFP-0017),
     https://www.consumerfinance.gov/policy-compliance/enforcement/actions/nissan-motor-acceptance-corporation/.
 19. See 11 U.S.C. 524(a) (providing that a bankruptcy discharge under title 11
     voids judgments and operates as an injunction against the commencement or
     continuation of an action “whether or not discharge of such debt is
     waived”).
 20. In the Matter of Trans-Fast Remittance LLC, also d/b/a New York Bay
     Remittance (2020-BCFP-0010),
     https://www.consumerfinance.gov/policy-compliance/enforcement/actions/trans-fast-remittance-llc/.
 21. CFPB, Tuition Payment Plans in Higher Education (Sept. 2023), at 29-30,
     available at
     https://files.consumerfinance.gov/f/documents/cfpb_tuition_payment_plan_report_2023-09.pdf
     .


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PUBLICATION DATE

JUN 04, 2024


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Consumer Financial Protection Circular 2024-03: Unlawful and unenforceable
contract terms and conditions


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